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China’s Economy: The Third Quarter

Thursday morning, all eyes turned to China for the latest read out on the state of the world’s second-largest economy.

The key question, going into a into the once-in-a-decade Chinese leadership transition that begins in earnest next month: Has the country’s economy stabilized or will growth continue to slow?

China Real Time charts it out.

Growth in gross domestic product slowed to 7.4% year-on-year, down from 7.6% in the second quarter and the lowest since the financial crisis.

On a quarter-over-quarter annualized basis (the way in which growth is measured in the United States and Europe), things looked considerably better. Growth accelerated to 9.1% in the third quarter, from 8.2% in the second.

Economists continued to raise doubts about the official QoQ growth rate. Wang Tao, China economist at UBS, estimated it to be about 7.6% in the third quarter, accelerating from below 7% in the second – considerably below the numbers published by the National Bureau of Statistics.

With doubts about the accuracy of the official GDP data, what are some alternative indicators saying?

Premier-in-waiting Li Keqiang is reported to have said that he looks at bank loans, electricity consumption and rail freight as a reliable guide to the growth of the economy. With growth in electricity consumption and rail freight both decidedly lackluster, a simple average of those three measures points to an economy growing at about 4% year-over-year in August, down from 6% at the end of the second quarter and 10% at the end of 2011.

Domestically, the main cause of China’s lackluster growth is the slowdown in real estate investment – the result of a two-and-a-half year campaign by Beijing to clamp down on bubbly prices.

That campaign now shows signs of bearing fruit: A China Real Time calculation shows average prices in 70 cities down 1.2% year-over-year in September. With incomes rising at close to double-digit rates, that does a lot to solve the affordability problem.

But the clampdown continues to take a toll on sales and construction. New residential floor space under construction fell 28% year-over-year in September, a turnaround from what looked like a return to growth in August.

Du Jinsong, property analyst at Credit Suisse, cautions that monthly data is volatile and that the downturn in the numbers was at odds with what their research team had been hearing on the ground. “A very large national construction company chief executive told us in September that he saw housing new starts accelerating, especially in the South China region,” he wrote in a note to clients.

The government hopes that stronger domestic consumption will help take up some of the slack from weaker investment.

Retail sales in September impressed, with real growth at 12.3%, up from August’s 11.2% and the highest so far this year.

Sales of cars were lackluster, down 1.7% year-over-year in September. Stronger growth earlier in the year may have reflected channel stuffing by manufacturers – forcing dealers to buy extra vehicles that stacked up at showrooms.

Robust retail spending was underpinned by tight labor markets and rising wages. Data from the Ministry of Human Resources and Social Security, released last week, shows demand for workers continuing to outstrip supply: The ratio of demand to supply came in at 1.05, unchanged from the second quarter, suggesting that anecdotal evidence of factory closures and worker unrest has not segued into mass layoffs.

In another sign that labor markets remain relatively tight, the ranks of migrant workers that staff China’s export factories and construction sites continued to grow. Average wages for this group were up 13% year-on-year in the year to September, slower than the 14.9% growth rate in the year to June.

Exports showed some signs of rebounding, with 9.9% year-on-year growth in September (up from 2.7% in August) and factories stocking up on parts purchased from Japan, Korea and elsewhere.

But analysts cautioned that with few signs of improvement in the economies of China’s main customers the U.S. and Europe, September’s uptick in exports could be a seasonal blip rather than the beginning of a recovery.

With Barack Obama and Mitt Romney trading barbs over China in their debate Tuesday, China’s politically sensitive trade surplus with the U.S. edged up to a record $21.1 billion in September.

China’s currency appreciation, on hold for much of the year, showed some signs of getting back on track. A weak dollar, reflecting the Federal Reserve’s decision to engage in a third round of quantitative easing, contributed to upward pressure on the yuan.

Ha Jiming, investment strategist at Goldman Sachs, said he expected the yuan to continue to appreciate modestly against the dollar in the months ahead.

Price pressure remained muted, with the consumer price index dipping to 1.9% year-over-year in September from 2.0% in August. Moderating food price inflation, which came in at 2.5% in September, was a key contributing factor.

Slowing inflation created room for the government to do more to ease policy. But after interest rate cuts in June and July, the government has contented itself with only modest moves to support growth.

The People’s Bank of China has ratcheted up liquidity injections from its open market operations – helping keep interbank lending rates low and making it easier for the banks to lend.

Banks responded with a steady stream of new loans: 623 billion yuan worth in September. That’s down from 703 billion yuan in August, but makes for an impressive year-on-year growth rate of 32%.

Corporate bond issuance and trust company loans were also strong, taking total social finance for September to 1.6 trillion yuan in September, up from 1.2 trillion yuan in August, and providing some confidence that new infrastructure and real estate projects are getting financed.

With growth showing signs of stabilizing, Ms. Wang, the UBS economist, cautions not to expect China’s new leaders to push the stimulus button when they start to take over the reigns in November.

“Do not hold your breath for new stimulus policies under a new leadership, but do watch for the cyclical forces in the economy: recovery in the property sector, stabilization of exports, impact from the existing policy support on infrastructure, and, the fading of corporate destocking” she wrote in a note to clients.